Michael in Print

Mark Zuckerberg’s apologies notwithstanding, his social media creation is first and foremost a tool for gathering information about everybody

It has been a tough few months for Facebook CEO Mark Zuckerberg. He has gone from tipping his toe in the presidential waters to being hauled before Congress to defend his company’s privacy policy.

His company has hit troubled waters, some of which stem from a lack of understanding of how the company really operates — and others of which are completely of Zuckerberg’s own making.

Let’s be honest. If you put material on Facebook, you have lost control of it. The company vacuums users’ personal information and traffics it into the marketplace. Data have become currency, and America’s tech industry, led by Google and Facebook, are the Vanderbilts and Rockefellers of data information sales.

It should come as little surprise that the company, as Bloomberg reports, goes so far as to scan links and personal photos people send by Facebook’s messenger app.

Your information is what fuels its bottom line and the company is one of the largest and most powerful corporations in human history.

Zuckerberg’s initial response to the “crisis” is typical of the company and an example of what Rahm Emanuel said: “Never let a good crisis go to waste.” In response to congressional concerns about privacy, the company announced it would sever relationships with third-party data providers.

Facebook claims its action will tamp down on the information, but the truth is that it will monopolize the data the company has collected. If Congress allows this sleight of hand to happen, Facebook will emerge stronger and more powerful than ever before.

For conservatives, Facebook has become a chokehold on information. From Rare, a libertarian-leaning news and information platform, to RightWingNews.com, a long-standing place for conservative-leaning stories, a tweak of the Facebook’s algorithm was enough to limit traffic to their sites, which ultimately led to their demise.

The fear that the progressives who dominate the tech industry will use their platforms to punish conservatives is not conspiracy. It is a fact. Google tips the scales on search results by using the race-baiting and vehemently anti-GOP Southern Poverty Law Center.

Facebook has partnered with Snopes, the liberal “fact-checker,” to determine what is fake news. Twitter has banned conservatives with large followings while ignoring liberals who often call for President Donald Trump’s demise.

Recently, Zuckerberg added gasoline to the fire by telling Vox.com that his vision for the platform is not free speech but the creation of an independent “supreme court” that would determine what is acceptable speech.

“[O]ver the long-term, what I’d really like to get to is an independent appeal,” Zuckerberg said. “So maybe folks at Facebook make the first decision based on the community standards that are outlined, and then people can get a second opinion.

“You can imagine some sort of structure, almost like a supreme court, that is made up of independent folks who don’t work for Facebook, who ultimately make the final judgment call on what should be acceptable speech in a community that reflects the social norms and values of people all around the world.”

Over the last few days, Facebook has been rolling out some positive-sounding policies to provide Zuckerberg with some ammo before Congress, including giving users greater control over what information third-party apps can gather and bulk-delete capabilities for such apps.

Congress would be foolish to allow Zuckerberg to use the privacy issue to gain even greater control of the marketplace.

But the company isn’t changing much about the info it collects and use. Make no mistake about it: Facebook remains a data company. It can make rhetorical claims about protecting user privacy, but it profits, and profits mightily, from consumers’ information.

Congress would be foolish to allow Zuckerberg to use the privacy issue to gain even greater control of the marketplace, while allowing him to walk away from the upcoming hearing without addressing the elephant in the room. That’s the tech industry’s willingness to limit speech and information in a manner that discriminates against conservatives.

Yet, for a case with such potentially broad implications, it doesn’t involve a high-profile data breach with millions of protected healthcare records roaming freely in the digital ether. Nor does it involve a single instance of identity theft or untoward use of patient information.

In fact, it’s doubtful that there was even a data breach.

The FTC’s enforcement action against LabMD focuses on two incidents dating back a decade. In the first instance, the FTC complaint charged that a report with the names, birth dates and Social Security numbers for 9,000 patients was compromised. But the back story is more complicated. A cybersecurity firm soliciting LabMD’s business allegedly “discovered” the report on a peer-to-peer file sharing program installed on one computer in LabMD’s accounting department. The cybersecurity firm allegedly shared the report with the FTC. There’s no evidence, however, that the report was shared with anyone else.

The second instance – the FTC charged – was a document with sensitive patient information that ended up in the hands of identity thieves in California. Again, there’s no evidence that this second document was used for illicit purposes, nor it is clear how the report found its way to California.

At the heart of the appeal is the scope and reach of the FTC’s enforcement powers under Section 5 of the FTC Act and the trigger for an enforcement action, all hotly debated issues since the case started in 2010 and a powerful test of the Commission’s authority. Section 5 prohibits “unfair” acts or practices that “cause[] or is likely to cause substantial injury to consumers….”

After a three-year investigation, the agency filed an Administrative Complaint in 2013 alleging that LabMD failed to adequately protect patient medical data, and demanded that, as part of a settlement, it institute a comprehensive data security program and submit to third-party security audits for the next 20 years. LabMD rejected the settlement.

Round One: LabMD Wins Administrative FTC Trial

In a stinging 91-page ruling, the agency’s own chief administrative law judge, J. Michael Chappell, dismissed the case against LabMD on the grounds that the Commission failed to demonstrate that it was “likely” consumers had been substantially injured – as required by Section 5 – by the two alleged data security incidents. ALJ Chappell concluded that the FTC failed to show any proof whatsoever of actual consumer injury. He flatly rejected the FTC’s theory that a statistical or hypothetical risk of future harm was enough to find LabMD liable for unfair conduct under Section 5 of the FTC Act.

“To impose liability for unfair conduct under Section 5(a) of the FTC Act, where there is no proof of actual injury to any consumer, based only on an unspecified and theoretical ‘risk’ of a future data breach and identity theft, would require unacceptable speculation and would vitiate the statutory requirements of ‘likely’ substantial consumer injury.”

Round Two: Commission Reverses ALJ

In its Opinion and Final Order, the Commission reversed the ALJ’s ruling and held that the “wrong” legal standard was applied and that the pertinent inquiry is whether the act or practice at issue posed a “significant risk” of injury to consumers.

“[C]ontrary to the ALJ’s holding that ‘likely to cause’ necessarily means that the injury was ‘probable,’” the Commission wrote, “a practice may be unfair if the magnitude of the potential injury is large, even if the likelihood of the injury occurring is low.” The Commission concluded that Congress had entrusted it with protecting a broad range of consumer harms and “need not wait for consumers to suffer known harm at the hands of identity thieves” before taking action.

Round Three: Stay Tuned

In a 20-minute spirited oral argument on June 21, 2017, the Eleventh Circuit asked why the Commission didn’t simply use rulemaking instead of an enforcement action if its concern is the prevention of future incidents. As one member of the court observed during the hearing: “A tree fell and nobody heard it, that’s the case we have here.” To listen to the oral argument, click here.

Even before oral argument, the Eleventh Circuit signaled its discomfort with the FTC’s position that actual or likely consumer injury wasn’t required under Section 5. In a pre-appeal motion, the court noted that LabMD had “made a strong showing” that the agency’s legal interpretation of Section 5 may not be reasonable.

The Eleventh Circuit’s ruling – whenever and however decided – will have far-reaching implications. If the FTC prevails, the agency will likely have more discretion in defining the threshold for consumer harm under a Section 5 enforcement action; and, the agency’s consent decrees will be viewed a body of precedents indicating what data security practices are considered “unfair” by the Commission. But if LabMD wins, the enforcement bar will be raised – requiring more than just speculative or hypothetical consumer injury – to sustain an enforcement action.

The Federal Trade Commission will have an opportunity to justify its data security enforcement authority when oral argument in LabMD Inc. v. FTC starts June 21 before the U.S. Court of Appeals for the Eleventh Circuit, attorneys told Bloomberg BNA.

One of the critical issues likely to emerge in the case is what level of harm is required for the FTC—the nation’s main data security and privacy enforcement agency—to act, attorneys said.

The issue of harm will be “front and center,” Phyllis H. Marcus, counsel in the global competition team at Hunton & Williams LLP in Washington, told Bloomberg BNA.

Oral argument “presents an opportunity for the FTC to explain its current view of ‘harm,’ and how it should be applied in the LabMD case,” Kurt Wimmer, Washington-based partner and chair of Covington & Burling LLP’s data privacy and cybersecurity practice, told Bloomberg BNA.

The FTC has no direct statutory or regulatory authority for enforcing the nation’s data security rules. In the absence of that authority, it relies on Federal Trade Commission Act Section 5—a catch-all prohibition against unfair and deceptive trade practices—to carry out data security compliance actions.

Companies under the FTC’s jurisdiction, from internet giants Amazon.com Inc. and Facebook Inc. to smaller businesses such as LabMD, have struggled with what level of data security they must provide to convince the agency that their efforts to protect personal data are reasonable.

Of those companies whose data security and privacy practices have been targeted by the FTC, very few have challenged its enforcement authority. Very few FTC data security actions are litigated, Marcus told Bloomberg BNA. Mostly, targeted companies have entered into no-fault consent orders with the FTC.

To date, there have been more than 50 data security settlements, according to the commission. LifeLock Inc., Oracle Corp., and Snapchat Inc. are among the companies that have settled with the agency.

A Question of Harm

The long-running dispute between the FTC and LabMD started when the agency alleged in 2013 that the Atlanta-based medical testing laboratory was storing patient information insecurely, on a peer-to-peer network. The now-defunct company countered that the agency hadn’t issued a rule or statement specifically describing the data-security practices permitted for patient information, and therefore lacked authority to bring the action.

LabMD objected to the FTC’s use of FTC Act Section 5 to take data privacy and data security enforcement actions. But in November 2015, FTC Chief Administrative Law Judge D. Michael Chappell ruled that the FTC had failed to show that LabMD’s data security practices either caused or were likely to cause substantial injury to consumers.

The FTC reversed Chappell’s ruling, holding that the disclosure of sensitive personal and health information was itself sufficient to establish consumer harm under Section 5. The commission also disagreed with the ruling that “likely to cause” necessarily means that injury was “probable.” Instead, it concluded that “a practice may be unfair if the magnitude of the potential injury is large, even if the likelihood of the injury occurring is low.”

However, the Eleventh Circuit stayed the effective date of the FTC’s enforcement action until the appeal is resolved. Granting the motion for a stay, the appeals court said that it isn’t clear whether reasonable interpretation of Section 5 includes “intangible harms like those that the FTC found in this case.”

The court also questioned the commission’s interpretation that “likely to cause” doesn’t mean “probable” but “significant risk.” The appeals court said it doesn’t read “the word ‘likely’ to include something that has a low likelihood,” and found that the FTC’s interpretation isn’t reasonable.

Although the outcome of the case can’t be predicted, the appellate court seems to have put LabMD in a strong position heading into oral argument.

LabMD has “momentum from the appellate court’s decision to stay the commission order,” said Marcus, while the FTC is coming from a defensive position. Moreover, the Eleventh Circuit’s stay order adopted LabMD’s argument and tone, and the court publicly expressed skepticism about the commission’s authority, she said.

LabMD is represented by Ropes & Gray LLP. Counsel for LabMD and the FTC declined to comment.

To contact the reporter on this story: Jimmy H. Koo in Washington atjkoo@bna.com

To contact the editor responsible for this story: Donald Aplin atdaplin@bna.com

LabMD Says FTC Shifting Args On Data Security Lapses

Law360, New York (March 10, 2017, 10:12 PM EST) — LabMD on Thursday stepped up its opposition to a ruling by the heads of the Federal Trade Commission that declared the company’s data security practices were inadequate to protect against unauthorized disclosures, telling the Eleventh Circuit the agency keeps shifting its arguments to fit a conclusion it reached long ago.

In a reply brief, LabMD Inc. shot back at a brief filed by the FTC last month, which urged the appellate court to uphold a July ruling in which the heads of the agency overturned their own administrative law judge and concluded that the company’s failure to employ “basic” security precautions led to an unauthorized disclosure of sensitive medical data that caused “substantial” harm to consumers, in violation of the unfairness prong of Section 5 of the FTC Act.The FTC had argued in its February brief that the company’s failure to take standard precautions like training staff about data security and using inexpensive monitoring tools caused actual harm in the form of invasion of patient privacy. But LabMD countered Thursday that not only was the conclusion incorrect, it was a predetermined judgment that none of the lab’s arguments could alter.

“The FTC’s response brief confirms that this is a paradigmatic case where ‘the Commission clearly made its decision before it considered any contrary conclusion,'” the lab said. “Just as in the proceedings below where the Commission ignored evidence favorable to LabMD and shifted its theory of injury once its ‘evidence’ of harm was shown to be fabricated, the Commission’s response now ignores many of LabMD’s arguments demonstrating the opinion’s flaws and instead … resorts to new theories that are not in the opinion.”

LabMD added that the commission in its response brief also “repeatedly mischaracterizes” both the commissioners’ opinion and “the flimsy record upon which it was based” in order to “falsely paint LabMD in a bad light.”

Specifically, the lab contended that the FTC claimed the leaked patient data file at the heart of the case was exposed to “millions” of Limewire users who had “unfettered access to it” when “in truth only a small fraction of users could have searched for it and their access was quite ‘fettered'”; that the commission had falsely asserted that the file contained patients’ diagnoses; and that the agency misrepresented that the lab affirmatively “disclosed” the file to cybersecurity firm Tiversa.

Tiversa, which is currently embroiled in separate litigation with the lab over the data exposure and is under investigation by the FBI for its dealings with federal regulators, claims that it discovered the file on Limewire, while LabMD has countered that Tiversa stole the file and gave it to the FTC after the lab had refused to purchase its security services.

However, LabMD noted in its recent motion that even if these points were presented accurately, they still wouldn’t be enough to justify upholding the commissioners’ decision, which the lab argued went far beyond the authority that Congress had bestowed upon the commissioners to police unfair practices under Section 5(n) of the FTC Act.

“Each interpretation of Section 5(n) that the FTC now asserts is directly at odds with Congress’ clear intent and is, in any event, unreasonable,” the lab argued.

LabMD pointed out that in its response brief, the commission “walked away” from the commissoners’ assertion in their July ruling that the exposure of the patient data file could have caused the nearly 10,000 consumers whose information was contained in the document embarrassment or reputational harm, and instead for the first time contended that “the wholly conceptual ‘privacy harm’ referenced in the opinion constitutes ‘substantial injury’ under Section 5(n) because it is ‘concrete.'”

“Even if the court could consider it, this newfound position is no more reasonable than the FTC’s original theory,” the lab argued, adding that both the plain meaning and legislative history of the unfairness prong foreclose the finding of a “substantial injury” based on intangible harms such as privacy invasion.

In a statement provided to Law360 Friday, LabMD CEO Michael Daugherty urged the examination of two points: “that all commissioners, including Acting Chairwoman [Maureen] Ohlhausen, participated in willful blindness by ignoring very contrary evidence that proves LabMD had data security practices the FTC bellows we did not” and “that FTC expert witnesses themselves state they were told by the FTC to assume as a given that LabMD’s data security practices were unreasonable.”

“When and where is the outrage and fury directed toward these bureaucrats who stacked the deck with lies and willful blilndness against a cancer facility. Have they no shame?” Daugherty added. “Why are they still working in the Trump administration? Health care will never recover with regulators like this knocking on our door as Congress looks the other way.”

A group of eight privacy and security law professors on Thursday threw their support behind the Federal Trade Commission in its Eleventh Circuit battle with LabMD to keep intact a ruling that an alleged data leak harmed consumers, saying the agency’s approach to regulating privacy spurs better protection practices.

In an amicus brief, the group of academics, who hail from the University of California Berkeley and George Washington University, among others, lent their support to the FTC’s July ruling that overturned its own administrative law judge and concluded the lab’s failure to employ “basic” security precautions led to an unauthorized disclosure of sensitive medical data that caused “substantial” harm to consumers, in violation of the unfairness prong of Section 5 of the Federal Trade Commission Act.

While LabMD and its own amici supporters have contended that the FTC stretched its own unfairness authority too far, the academics on Thursday wrote that the agency’s use of its unfairness authority in the data privacy context actually encourages corporations to develop “progressive and dynamic approaches to privacy policies.”

“Its enforcement actions, in particular, have encouraged responsible companies to invest in internal privacy and security professionals and increased the power and resources these professionals have to evolve and strengthen firm privacy practices,” the group wrote.

Though the medical lab and its supporters have criticized the agency’s enforcement action as a “circumventing of the legislative process,” which harms businesses by subjecting them to vague and constantly changing data security measures,” the professors said Thursday the FTC’s governance style has been “open and collaborative,” and that its actions against LabMD were nothing out of the ordinary.

“The FTC has frequently used its Section 5 authority to curb or prevent disclosure of consumers’ confidential medical information in prior health-related enforcement actions,” the academics wrote. “Its finding of injury and substantial risk of injury stemming from LabMD’s disclosure of patient medical records here is thoroughly consistent with the FTC precedent.”

Thursday’s amicus filing comes on the heels of a Feb. 10 reply brief the FTC filed in the Eleventh Circuit defending its July decision and striking back against LabMD’s opening brief claims it overstepped its authority and in the process destroyed the small medical testing company’s business, which shuttered in 2014 due to the expense of fighting the enforcement action.

LabMD in particular has taken issue with the commissioners’ conclusion that the purported leak of a file containing personal data belonging to approximately 9,300 patients in 2008 constituted the type of “substantial” injury necessary to support a Section 5 claim, especially since there was no evidence that any of the compromised data had ever been misused or that the affected consumers had suffered any tangible harm.

A group of amici from the business, tech and medical communities, including the U.S. Chamber of Commerce, TechFreedom and the National Technology Security Coalition, backed up the lab in early January, contending that the power that Congress bestowed upon the commission when enacting Section 5 do not include the ability to set and enforce general data security policy.

In a response to the professors’ brief in support of the FTC, LabMD CEO Michael Daugherty told Law360 it was “quite telling that the FTC could only muster up academic lawyers.

“Where are all the technologists, chief information security officers, physicians and business leaders supporting the FTC? They’re not,” Daugherty said. Only academics and bureaucrats who make their living off regulation and government can look the court in the face and believe concrete harm comes from any situation where no victims can be found.”

Six amicus briefs filed by business, tech and medical interests in a federal court Tuesday and on Dec. 28 support LabMD’s argument that the Federal Trade Commission (FTC) operated outside its authority when it found the now defunct cancer testing firm to in violation of Section 5 of the FTC Act following what the commission has characterized as a data breach.

“I am heartened that leaders from business, healthcare and technology are so supportive of LabMD,” company founder, President and CEO Michael J. Daugherty said in comments to SC Media. “They understand how this case will impact their own compliance efforts.”

He added that since “the FTC has tried everything to vilify LabMD, having our own physician clients eager to sign on and file their own brief was the cherry on top.” In addition to a group of doctors, cybersecurity pro Gary Miliefsky, TechFreedom, the International Center for Law and Economics, the National Federation of Independent Business Small Business Legal Center, and the National Technology Security Coalition filed in favor of the company’s efforts to challenge the FTC.

LabMD launched its appeal in December in the Eleventh Circuit court after the same court granted a temporary stay of the FTC’s order against the company. The case against LabMD has stretched from 2013 when the commission pursued enforcement action against the facility for leaving information on patients vulnerable to exposure through a file-sharing program. It has taken a number of twists and turns, some of them ugly and even sparked a congressional committee probe.

FTC Chief Administrative Law Judge Michael Chappell, dismissed the case on November 16, 2015, ruling that the FTC “failed to carry its burden of proving its theory that Respondent’s alleged failure to employ reasonable data security constitutes an unfair trade practice because Complaint Counsel has failed to prove the first prong of the three-part test – that this alleged unreasonable conduct caused or is likely to cause substantial injury to consumers.”

But the commission challenged Chappell’s ruling and found LabMD to be in violation of Section 5 because it did not reasonably secure the data in its custody. The Eleventh Circuit gave the Atlanta-based company an opening for appeal in the fall with the temporary stay and the company filed the appeal in late December.

Arguing that medical data is governed and protected by HIPAA and noting the potential conflicts between that law and Section 5, a group of doctors in one brief said they and others “have a strong interest in ensuring that the FTC cannot abuse its “unfairness” authority to regulate the practice of medicine by imposing new, confusing, and burdensome patient-information data-security obligations inconsistent with federal healthcare law.”

Federal Trade Commission (FTC) officials issued “new, confusing and burdensome” data security requirements that are “inconsistent with established federal healthcare law,” according to the non-profit government watchdog Cause of Action Institute.

The group’s comments came in a statement Wednesday after it filed an Amicus Curiae brief on behalf of 10 doctors in a federal court case. The FTC’s regulatory overreach has harmed medical patients’ welfare and put a cancer-detection laboratory out of business, the doctors claimed in their brief.

“In its disregard for the rule of law and due process, the FTC destroyed a small cancer detection laboratory whose primary mission was to serve its physician-clients and save lives,” said Cause of Action Institute Assistant Vice President Patrick Massari in the statement.

Eventually, LabMD decided to stop being cooperative with the FTC and to fight back. And fight they did: Various lawsuits were filed challenging the FTC’s authority to come after LabMD. Though the company lost, they were able to slow the FTC down to the extent it was necessary to deal with LabMD’s counter-punches. (Since 2013, LabMD’s defense has been handled pro-bono.)

The FTC’s action began in 2013 with the filing of its formal complaint against LabMD through its administrative dispute process. Then, in 2014, a Tiversa whistle-blower called LabMD’s president to say that none of the data had ever gone beyond Tiversa. The FTC proceeding was delayed while the whistle-blower sought, and eventually obtained, immunity from the DOJ. In the meantime, Rep. Issa’s committee Staff Report was embargoed until the conclusion of the whistle-blower’s testimony. The Staff Report was clearly critical of the FTC. Ultimately, the FTC administrative law judge held for LabMD and against the FTC. The FTC appealed to the full three-member commission.

The full commission of the FTC ruled this summer that the administrative law judge was wrong, and reversed the decision. The full commission decision runs some 37 pages. In it, the commission imposes data security and regular reporting requirements on LabMD (and the use of a third-party assessor engaged by LabMD.) At least in part, the FTC tips its hand as to what it considers reasonable data security management practices to be. The costs of these FTC requirements are, according to the recent 11th Circuit ruling, hotly disputed. But they are certainly not zero.

LabMD isn’t done with the FTC yet, according to the Bloomberg article. Daugherty says that he had to lose before the full Commission (which has just occurred) in order to sue the FTC in federal court, outside the agency’s administrative arena. The Bloomberg article quotes Daugherty as saying that “I am basically opening the playbook to the world, which is what I ultimately want to do. We’re going to have a fair fight.”

That seems to be what has begun to happen. This is a complex multi-year situation with much litigation over many claims. But the “big picture” issue which should be of paramount interest to everyone is the heavy-handed action of the FTC against a small business. Apparently, the FTC views a business with the unmitigated audacity to challenge the FTC’s authority as a major threat. Their actions (described in the Bloomberg article and in a prior blog post) when they began their enforcement show that to be the case – very unambiguously.

The 11th Circuit was certainly not deferential to the FTC in its recent decision. Based on the language in the recent ruling staying the enforcement of the FTC’s full-commission order, it seems there is a solid chance the Court will look deeply (and critically) into the FTC’s actions, as well as the agency’s asserted grounds for its authority to take those actions.

This is indeed a cautionary tale about how the Federal government can destroy a company in an enforcement action, and it is a story which is not over yet – despite the destruction of LabMD as a going concern. But there may already be potentially important lessons to be learned. The details of the FTC’s decision are the subject of the next article, in an attempt to glean some guidance as to what its stated expectations of a small business are.

*AN IMPORTANT NOTE: The facts as summarized in this article are all according to published reports, and this article is only a synthesis of published reports on the subject. There is ongoing litigation, and each side contests the other’s position. This article is based in large part on Dune Lawrence’s detailed article “A Leak Wounded this Company. Fighting the Feds Finished It Off” in the April 25, 2016, issue of Bloomberg Businessweek.

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